Stock Pick from Finance Industry

Here Is Why:

• Asset quality has been improved over the last one year
• Target to achieve a healthy asset growth of 25 per cent for FY16
• Trying to narrow RoE gap with peers in next two years

L&T Finance Holdings (LTFH) is a well-diversified NBFC having wide presence in both retail and infrastructure segments. The company has a strong parentage and highly qualified management team which has significant experience in evaluating long-gestation infrastructure projects. It consciously de-risked its balance sheet in both retail and infrastructure portfolio and has identified select segments to pursue profitable growth.

LTFH reported 20 per cent growth in the consolidated net profit to Rs 710.8 crore FY15 excluding exceptional gain of Rs 144 crore on sale of investment in City Union Bank. The profit growth has been aided by healthy margins, increased fee income, stable capex and improvement in asset quality. The net interest income grew 32.6 per cent at Rs 2628.4 crore as against Rs 1982 crore corresponding period of last year due to Net Interest Margins (NIMs) has improved by 20 bps to 5.7 per cent in FY15.

LTFH’s asset quality has been on a restoration path after suffering deterioration during FY10-FY14. Gross NPA and Net NPA have shown a significant improvement due to robust collections and judicious sale of certain stress assets to asset reconstruction companies (ARCs). Gross NPA during the quarter under review declined to 3.01 per cent against 3.18 per cent and net NPA to 1.98 per cent from 2.29 per cent over the previous year quarter. Provision coverage ratio improved to NPAs at 44 per cent at end March 2015 from 28 per cent at end March 2014.

Loans grew 18 per cent to Rs 47232 crore at end March 2015 over Rs 40,082 crore at end March 2014, led by healthy disbursement growth of 25 per cent in key focus areas i.e. B2C products - tractors, two wheelers, housing and microfinance in the retail business and operational projects in the sectors of renewable power and roads in the wholesale business. B2C products constitute 57 per cent of the total loan outstanding (B2B for the rest 43 per cent) in the retail business, while operating projects account for 47 per cent of the total loan outstanding in the wholesale business. The company has focused on diversifying sources of funds. It has increased proportion of market borrowings, while reduced the share of banks borrowing from 47 per cent in FY14 to 33 in FY2015. It has set a target to achieve a healthy asset growth of 25 per cent for FY16.

The investment management business clocked a 23 per cent growth in Average Assets Under Management (AAUM) to close the year at Rs 22497 crore compared to Rs 18255 crore for the same period last year. Equity assets surged 78 per cent to Rs 8774 comprising 39 per cent of total AAUM. AMC business begins to contribute positively to the bottom line - strong growth in revenues and optimal cost structures.

If we observe return ratios of the company, ROE reported at 11.1 per cent in FY15 which is much lower than compared to industry average. However, the company trying to RoE gap to narrow with peers over next two years and targeted in the range of 18-20 per cent. Hence we recommend buying this stock with the expectation of 25 per cent upside in the next one year.